ESG Investing in a Fragmented US Regulatory Landscape

Environmental, social, and governance (ESG) investing in the United States remains at the center of a sustained legal and regulatory debate. That debate is not confined to a single forum or authority. Rather, it is playing out simultaneously across federal agencies, the US Congress, courts, and, critically, states. For asset managers, institutional investors, sponsors, and other market participants, this regulatory environment presents both material risk and strategic opportunity.

At its core, the current US ESG environment reflects two competing views. One frames ESG factors as relevant to long-term value creation because they are material to investment performance and responsive to investor concerns about issues such as climate change, workforce practices, and governance. The other views ESG considerations as ideologically driven, disconnected from wealth creation, and potentially inconsistent with fiduciary obligations. These opposing perspectives are driving many of the legal challenges now confronting ESG-related investment strategies.

However, despite this landscape of debate, this environment can still present opportunities; the challenge is finding ways to navigate those opportunities with less risk. For example, for sophisticated managers and institutional investors, there can remain opportunities to reach those US investors seeking strategies that incorporate ESG, so long as they are tied to financial returns and risk management and structured to withstand scrutiny across overlapping and, at times, conflicting federal and state regimes.

This Insight, based on a presentation from our Global ESG Trends webinar series, examines four areas where US regulatory and litigation pressure has been most pronounced.

ESG INVESTING IN THE US TODAY

The US ESG legal landscape is increasingly defined by a continuing legal battle over the role of ESG factors in investment decision-making. That battle is unfolding at multiple regulatory levels and across a wide range of legal doctrines, creating a sense of whiplash as policies shift and new enforcement practices emerge. Tensions exist not only between the federal government and the states but also between the US Congress and federal agencies and between “blue” and “red” states.

Proponents of ESG investing argue that ESG factors are relevant to long-term wealth creation because they are material to financial performance and that ESG integration responds to investor demand and evolving expectations around climate risk, human capital management, and corporate accountability.

Critics, by contrast, frame ESG as ideologically motivated, asserting that it elevates non-financial goals over investor returns and undermines fiduciary duties.

These competing narratives form the backdrop for a rapidly evolving patchwork of laws, enforcement actions, and litigation that directly affect how ESG considerations are framed, implemented, and disclosed in the United States.

HOW STATES ARE RESHAPING ESG INVESTING

Why State ESG Policy Matters

State ESG policy has outsized importance because of the sheer size of US public pension and state-controlled assets, which often serve as the first testing ground for ESG mandates and prohibitions. State laws and attorney general actions are increasingly targeting investment decision-making frameworks, proxy voting and engagement practices, and commercial relationships with state entities.

For investment managers and institutional investors, the practical impacts can include placement on restricted or blacklist regimes, heightened disclosure and reporting obligations, and exposure to investigations or litigation. For non-US managers, particularly those in Europe, these dynamics underscore the need to translate existing ESG approaches into a form that travels well in the United States, making clear how ESG factors relate to return and risk, mapping strategies to differing state rules, and aligning governance and disclosure practices with US expectations.

A Fragmented and Evolving State Rulebook

Since 2021, a growing number of states have enacted ESG-related statutes, regulations, and policy directives, producing a complex and sometimes internally inconsistent mix of requirements and prohibitions. There is no single US ESG rulebook. Instead, states have adopted a range of approaches, including the following:

• Prohibitions on ESG consideration, which often require investment decisions to be based solely on “pecuniary” factors and restrict the pursuit of non-pecuniary goals through investment or stewardship activities
• Prohibitions on ESG discrimination, which bar state actors or companies doing business with the state from “discriminating” against particular industries or entities based on ESG-related criteria or scores
• No-boycott regimes, which require state officials to identify financial institutions deemed to “boycott” specified industries (e.g., fossil fuels) and restrict state entities from contracting or investing with listed firms
• ESG consideration requirements and ESG-based investment prohibitions, which promote or mandate the integration of ESG factors or restrict investment in designated sectors
• Disclosure laws, which require entities to disclose whether and how ESG factors are considered, including climate-related risk and emissions reporting requirements

How State Rules Operate in Practice

State ESG rules typically focus on public assets (such as state pension plans, treasuries, and university endowments) and state contracting activities involving banks, underwriters, and investment managers.

States deploy multiple enforcement levers, including conditions on investing state assets, procurement and contracting restrictions, disclosure and attestation requirements, scrutiny of proxy voting and engagement practices, and investigations or administrative actions led by attorneys general. A key practical takeaway is that the same global ESG program may be workable in one state while presenting litigation or enforcement risk in another.

Recent state actions illustrate the breadth of these tools, including attorney general suits alleging deceptive practices tied to ESG strategies, updates to boycott lists that can rapidly change eligibility status, and ongoing litigation over state climate disclosure laws. Even in states viewed as more supportive of ESG, regulators increasingly emphasize substantiation, focusing on what firms actually do and not just what they say. Against that backdrop, “greenwashing” has emerged as a central enforcement theme. Regulators are less concerned with whether a strategy carries an ESG label than with whether claims about ESG integration, impact, or stewardship are accurate, supportable, and grounded in the manager’s actual investment and engagement practices.

WHEN ESG MEETS ERISA

Litigation and Fiduciary Risk

US private retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) present a distinct set of ESG-related challenges. Recent litigation has advanced what has been described as an “ESG-manager theory” of fiduciary breach, expanding the focus to include not just whether a plan offers ESG-branded funds (or considers ESG factors) but also scrutiny of broader ESG activities, particularly proxy voting and engagement undertaken on behalf of the plan.

In a recent case involving a large corporate retirement plan, the court found that the manager’s ESG strategies and proxy voting activities elevated non-financial goals over the best interests of plan participants, violating ERISA’s duty of loyalty. Notably, the court also emphasized the lack of documented, meaningful discussion of proxy voting between plan fiduciaries, consultants, and managers prior to litigation.

Equitable Relief and Operational Impact

In that litigation, although the court ultimately found no financial loss to the plan, it imposed sweeping equitable relief. This included restrictions on proxy voting motivated by non-pecuniary objectives, enhanced independence requirements for plan committees, expanded disclosure and certification obligations, and public reporting of affiliations with ESG-related initiatives.

The case underscores that ERISA-related ESG risk extends well beyond fund labeling. Proxy voting, engagement practices, governance relationships, and external ESG disclosures have become central areas of scrutiny, even for plans that do not offer ESG-branded investment options.

Regulatory Overlay

Litigation risk is compounded by renewed regulatory and political activity. For example, in December 2025, the White House issued an executive order (EO), Protecting American Investors from Foreign-Owned and Politically-Motivated Proxy Advisors. The EO directed the US Department of Labor (DOL) to revisit fiduciary standards applicable to asset managers and proxy advisors, reflecting increased scrutiny of proxy voting as a fiduciary function. At the same time, Congress has advanced legislation emphasizing pecuniary-only standards, and the DOL has placed additional ESG-related rulemaking on its regulatory agenda.

Despite this heightened scrutiny, ESG consideration is not per se prohibited under ERISA. With appropriate governance, documentation, and framing of ESG factors as relevant to risk and return, ERISA plans can continue to consider ESG issues in investment decision-making and proxy voting.

In addition, US securities law concepts such as the distinction between “passive” and “active” beneficial ownership under the Schedule 13D/13G framework mean that engagement and stewardship activity can carry consequences beyond fiduciary law, including changes in public reporting obligations where a manager is viewed as seeking to influence an issuer.

ESG COMMITMENTS IN THE ANTITRUST SPOTLIGHT

Antitrust Scrutiny of Sustainability Collaborations

Beyond investment decision-making, ESG and sustainability commitments themselves have come under increasing scrutiny under US antitrust law. US antitrust statutes prohibit agreements that unreasonably restrain competition, including group boycotts and coordinated refusals to deal, and critics have sought to map some collaborative ESG initiatives onto these categories.

Certain sustainability initiatives, such as climate-related alliances and net-zero commitments, have been characterized by critics as evidence of coordinated efforts to restrict capital to particular industries, especially fossil fuels. These arguments frame such initiatives as “climate cartels” that allegedly coerce issuers, constrain supply, and raise prices.

Litigation and Investigations

While no court has to date upheld these theories through litigated findings, several high-profile lawsuits and investigations have tested their contours. In one notable case, a coalition of states alleged that asset managers conspired through climate activism to discourage coal production. Although the court did not rule on the merits, it allowed the case to proceed past the motion-to-dismiss stage, finding that the allegations were sufficient to warrant further litigation.

In parallel, congressional committees, state attorneys general, and federal agencies have launched investigations into ESG and diversity, equity, and inclusion (DEI) commitments; climate disclosure organizations; and sustainability standards. These actions highlight the risk of costly and time-consuming scrutiny, even in the absence of adverse judicial outcomes.

Managing Antitrust Risk

Sustainability commitments are not per se unlawful, and many have evolved to address legal risk. Nonetheless, firms face ongoing exposure to investigation and litigation.

Practical risk mitigation measures include scrutinizing ESG-related disclosures and contracts, avoiding practices that could be construed as collective coercion, and clearly documenting that business decisions are made independently and grounded in individual risk management and economic objectives.

PROXY VOTING AS THE NEW ESG FLASHPOINT

Heightened Focus on the Proxy Ecosystem

Proxy voting and engagement have emerged as focal points in the broader ESG debate. Regulators and policymakers have increasingly questioned whether proxy advisory firms and asset managers exert undue influence or advance non-pecuniary agendas through coordinated voting and recommendations.

As noted above, in December 2025, the White House issued an EO focused on proxy voting activities. The EO takes the position that certain large proxy advisory firms wield too much influence (including with respect to corporate governance, shareholder proposals, board composition, executive compensation, capital markets, and retirement investing) and are using that influence “to advance and prioritize radical politically-motivated agendas” related to DEI and environmental, social, and governance (ESG). The EO aims to increase federal oversight over the proxy advisor industry.

The EO directs the Securities and Exchange Commission to reassess the regulatory framework applicable to proxy advisors, including transparency, anti-fraud enforcement, and potential registration requirements. It further instructs the Federal Trade Commission to evaluate ongoing antitrust concerns within the proxy advisory market. While the EO does not impose immediate changes, it signals a continued scrutiny of proxy advisory services,

Several states have enacted or proposed laws imposing new disclosure obligations on proxy advisors, particularly where advice is alleged to diverge from shareholders’ financial interests. These measures have been accompanied by investigations and litigation alleging deceptive practices, antitrust violations, and breaches of fiduciary duty.

Federal Oversight and Future Direction

At the federal level, executive action has directed agencies to review the regulatory framework governing proxy advisors, assess whether additional registration or transparency requirements are warranted, and evaluate the use of proxy advice that incorporates ESG or DEI considerations. These developments point to continued scrutiny of proxy voting infrastructure and stewardship practices.

For institutional investors, asset managers, sponsors, and other market participants, a practical implication is that proxy voting guidelines, stewardship reports, and broader ESG disclosures should be given renewed review to consider the proper role of ESG factors. In that context, customization, clear client instructions, and robust governance processes become critical to managing both regulatory and misstatement risk.

KEY TAKEAWAYS

The US ESG investing landscape remains complex, fragmented, and highly dynamic. Legal and regulatory pressure spans state public assets, private retirement plans, sustainability commitments, and proxy voting practices. Yet, despite these challenges, ESG considerations are not prohibited, and investor demand for disciplined, return-driven ESG-adjacent strategies persists.

In sum, asset managers, institutional investors, sponsors, and other market participants navigating ESG strategies should consider the following as 2026 progresses:

• ESG risk in the US is highly state-specific, requiring flexible and defensible approaches calibrated to differing legal regimes and enforcement postures
• Proxy voting and engagement have become central areas of scrutiny across fiduciary, antitrust, and consumer protection frameworks
• ERISA-related risk extends beyond ESG-labeled products and underscores the importance of governance, documentation, and pecuniary framing
• Sustainability commitments and collaborative initiatives require careful antitrust analysis and clear articulation of independent decision-making

In this environment, success depends less on slogans and more on substance: leading with returns and risk management, maintaining consistent and supportable disclosures, and aligning stewardship practices with fiduciary and regulatory expectations. A disciplined, well-governed ESG strategy remains possible, particularly where ESG narratives are grounded in, and substantiated by, what firms actually do.

Legal Practice Assistants Mia Deck and Brian Harbaugh contributed to this Insight.